403(b) Plan and disregarded entity

So, non-profit employer "A" sponsors a 403(b) plan. Employer "B" is a disregarded entity, but signed on as a participating employer to "A's" plan, on the advice of counsel, just to make things clear. Now employer "B" is breaking off from Employer "A" and is going to change to a for-profit entity as of the separation date.

"B" is going to, probably, install a 401(k) plan, although probably not with us as the investment person is hyped on bundled arrangements. Que sera sera.

It seems to me that this would be considered a termination of employment for these participants, and they would be eligible for distribution or rollover as they choose. Is my thinking on this flawed?

Does this rule help support an interpretation?

Special rule regarding severance from employment. For purposes of this section, severance from employment occurs on any date on which an employee ceases to be an employee of an eligible employer, even though the employee may continue to be employed either by another entity that is treated as the same employer where either that other entity is not an entity that can be an eligible employer (such as transferring from a section 501(c)(3) organization to a for-profit subsidiary of the section 501(c)(3) organization) or in a capacity that is not employment with an eligible employer (for example, ceasing to be an employee performing services for a public school but continuing to work for the same State employer). Thus, this paragraph (h) does not apply if an employee transfers from one section 501(c)(3) organization to another section 501(c)(3) organization that is treated as the same employer or if an employee transfers from one public school to another public school of the same State employer.

26 C.F.R. § 1.403(b)-6(h) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-6#p-1.403(b)-6(h)

Thanks Peter!